South Korea's credit card companies, a key segment of the country's financial industry, are being pushed to the edge. As interest rate increases gather pace, the Bank of Korea has joined major credit rating agencies in warning about rising funding costs and deteriorating asset quality. Analysts say the strain is compounded by a slowdown in the card issuers' core credit card business under a range of regulations.
The delinquency rate at card companies stood at 2.34% at the end of March this year, the highest in about 12 years since 2014, according to the Bank of Korea on the 24th. With borrowers' capacity to take on more debt squeezed by rising rates since 2022, other financial institutions have cut back on unsecured lending, pushing low-credit and low-income borrowers toward card loans and driving delinquencies higher, analysts said.
The central bank warned of weakening asset quality, noting that card lending is concentrated among low-credit borrowers, whose usage of cash advance limits is climbing along with delinquency rates. Headline delinquency rates at card companies have stayed low not because overdue balances have shrunk but because the firms have stepped up sales and write-offs of bad loans, the bank said.
Higher funding costs are another risk, adding to the burden of repaying card bonds. Card bonds issued at rates in the mid-3% range are now coming due, while new issuance yields rose to the mid-4% range in July and August this year. The volume of maturing card bonds is also above the long-term average, and with rates higher, refinancing pressure will build gradually, analysts said.
Korea Investors Service also expects card companies to feel the impact of rising rates. Operating margins have improved somewhat, but delinquency rates are climbing quickly. The rate at which card loan assets fall into arrears has run above its long-term average continuously since 2022. The share of precautionary loans at the seven credit card firms rose to 3.59% at the end of June this year from 3.20% at the end of 2025, a sign that latent bad debt is building.
The bigger problem is that growth in the card companies' core business is slowing. The card market is saturated, and alternative payment methods are spreading. The central bank noted that return on assets is declining in credit sales, the industry's main revenue source, as merchant fee rates fall and marketing costs rise. If growth in operating assets slows because of competition from alternatives such as simple payment services and limits on card lending under household debt controls, the room to expand earnings will inevitably narrow, the bank said.
"In a situation where the earnings base keeps weakening, there is a possibility that resilience could deteriorate if rising interest rates bring higher funding costs and weaker asset quality at the same time, and this warrants attention," a Bank of Korea official said.
